What is a forward contract?

A forward contract is a financial agreement between two parties to buy or sell an asset, such as a currency, at a predetermined price on a specified future date. The key aspect of this contract is that it locks in the exchange rate at the time of the agreement, allowing parties to hedge against fluctuations in currency values. This is particularly important for businesses and investors operating in global markets, as it provides certainty in planning and budgeting for future transactions, reducing the risk associated with currency volatility.

In contrast, the other options do not accurately describe a forward contract. A contract allowing immediate delivery of currency at market rate pertains more to spot transactions, where the exchange happens right away. Speculative agreements for currency trading typically refer to derivatives like options or futures, rather than forward contracts, which are primarily used for hedging. Lastly, while forward contracts can serve a purpose in managing currency risk, they do not directly relate to hedging against inflation in foreign investments. Hence, the description of a forward contract as a fixed-rate agreement for future currency exchange is accurate and emphasizes its function in risk management and financial planning.